Question 1

If the United States is running a deficit trade balance with Great Britain, we would expect the value of the British pound to depreciate against the U.S. dollar.

Accepted Answer

If the United States is running a trade deficit with Great Britain, it means that the U.S. is importing more goods from Great Britain than it is exporting to Great Britain. This means that there is a greater demand for British pounds to pay for these imports, which would increase the value of the pound relative to the U.S. dollar. Therefore, we would expect the value of the British pound to appreciate against the U.S. dollar in this scenario, not depreciate.

Question 2

A Eurodollar is a U.S. dollar deposited in a bank outside the United States.

Accepted Answer

A Eurodollar is a U.S. dollar that is deposited in a bank outside the United States.

Question 3

When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency per dollar.

Accepted Answer

When the U.S. dollar appreciates, it means it has increased in value relative to another currency, allowing more of the foreign currency to be purchased with the same amount of dollars.

Question 4

Individuals and corporations buy or sell forward currencies as a means of hedging exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.

Accepted Answer

Hedging exchange rate exposure typically involves buying the currency expected to appreciate and selling the currency expected to depreciate to protect against unfavorable exchange rate movements.

Question 5

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Accepted Answer

Fluctuations in exchange rates can impact the value of a multinational firm's inventory. For instance, if the value of the currency in which the inventory is denominated drops, the value of the inventory in the company's reporting currency may also fall. This may make the company's financial statements look worse, even though the actual inventory has not altered. As a result, firms must account for exchange rate fluctuations in their inventory management plan to avoid financial losses.

Question 6

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

Accepted Answer

Exchange rate risk refers to the possibility that fluctuations in exchange rates can reduce the value of cash flows from a foreign project when they are converted to the parent company's home currency. Therefore, the statement is true.

Question 7

The United States and most other major industrialized nations currently operate under a system of floating exchange rates.

Accepted Answer

Most major industrialized nations, including the United States, have transitioned from fixed exchange rates to floating exchange rates in recent decades. Under a floating exchange rate system, the value of a currency is determined by supply and demand in the foreign exchange market.

Question 8

The Eurodollar market is essentially a long-term market; most loans and deposits have maturities of longer than one year.

Accepted Answer

The Eurodollar market is actually a short-term market, with most loans and deposits having maturities of less than one year.

Question 9

Multinational financial management requires that financial analyses consider the effects of changing currency values.

Accepted Answer

Multinational financial management involves dealing with currencies of different countries, therefore, changes in currency values can significantly impact financial analyses.

Question 10

Exchange rate quotations consist solely of direct quotations.

Accepted Answer

Exchange rate quotations can be either direct or indirect. Direct quotations indicate the foreign currency per unit of domestic currency (for example, USD/JPY = 109.75 means one US dollar is worth 109.75 Japanese yen), while indirect quotations indicate the domestic currency per unit of foreign currency (for example, JPY/USD = 0.0091 means 0.0091 yen is worth one US dollar).

Question 11

Calculating a currency cross-rate involves determining the exchange rate for two currencies by using a third currency as a base.

Accepted Answer

Calculating a currency cross-rate involves using a third currency as a base to determine the exchange rate between two currencies. For example, if you want to determine the exchange rate between the Euro and the British Pound, you would use the US Dollar as a base currency and calculate the exchange rates between USD/EUR and USD/GBP, and then use those rates to determine the EUR/GBP cross-rate.

Question 12

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations.

Accepted Answer

LIBOR is an average of interest rates offered by London banks to other London banks, not specifically to U.S. corporations. However, LIBOR is widely used as a benchmark for various financial products and investments around the world, including for U.S. corporations.

Question 13

If a dollar will buy fewer units of a foreign currency in the forward market than in the spot market, then the forward currency is said to be selling at a premium to the spot rate.

Accepted Answer

When a currency is selling at a premium in the forward market, it means that the forward exchange rate is higher than the spot exchange rate. This implies that the foreign currency will be more expensive in the future than it is currently. Therefore, a dollar will be able to buy fewer units of the foreign currency in the forward market than in the spot market.

Question 14

Legal and economic differences among countries, although important, do not pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Accepted Answer

Legal and economic differences can pose significant challenges for multinational corporations when coordinating and controlling worldwide operations of subsidiaries. These differences can include variations in taxation, regulations, cultural differences, and political instability. Multinational corporations must navigate these differences to ensure compliance with local laws and regulations and to maintain a competitive advantage in the global marketplace.

Question 15

If an investor can obtain more of a foreign currency for a dollar in the forward market than in the spot market, then the forward currency is said to be selling at a discount to the spot rate.

Accepted Answer

When a forward currency is cheaper (in terms of domestic currency) than the spot rate, it is said to be selling at a discount. This means that an investor can buy more of the foreign currency in the forward market for a dollar than in the spot market.

Question 16

Credit policy for the multinational firm is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

Credit policy for multinational firm is indeed more risky because of the additional consideration of exchange rates and uncertainty over the credit worthiness of foreign customers.

Question 17

Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.

Accepted Answer

Working capital management for multinational firms is more complex than it is for domestic firms due to the additional complexities of managing currencies, international regulations, and cross-border transactions. Additionally, multinational firms may have operations in multiple countries with varying economic conditions and financial regulations, which can further complicate the management of working capital.

Question 18

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Accepted Answer

The threat of expropriation, which is when a government seizes privately owned property without compensation, can create uncertainty for multinational firms operating in that country. This can lead to the firm minimizing inventory holdings and only importing goods when they are needed to reduce the amount of assets that could potentially be taken by the government.

Question 19

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

Accepted Answer

This statement is false. Multinational corporations can address political risk through various strategies, such as diversifying their operations across different countries, hedging currency and political risk, and obtaining political risk insurance. It is important to consider political risk in financial analysis, as it can have a significant impact on a company's operations and profitability.

Question 20

A foreign currency will, on average, depreciate against the dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Accepted Answer

This is known as the purchasing power parity theory, which suggests that currencies with higher inflation rates will have a tendency to lose value relative to currencies with lower inflation rates. This is because higher inflation rates erode the purchasing power of a currency, making goods and services more expensive, while lower inflation rates maintain purchasing power and keep prices relatively stable.

Quiz 27: Multinational Financial Management